A limited company allows contractors to be separate legal entities from their company, meaning they have a “limited” liability and are notpersonally liable for any financial difficulties faced by the company. If your company is bankrupt, your personal bank accounts, car, house etc. cannot be claimed, as you have a “limited” liability.
As a sole trader you get taxed on your income, you may end up paying 30% tax on gross income. Via a limited company you pay Corporation Tax and can get paid with a mix of a low wage and dividends, which means you will pay less tax and less NICs.
Through a limited company you can also claim business expenses which can include equipment, mileage allowance, business trips, stationary etc. Business expenses are deducted from the company’s profit which is not taxed, so you will end up paying less tax at the end of each tax year.
This is the simplest option for contractors since any profits are automatically yours since there is no separation between you and the business. You will need to file a Self-Assessment Tax Return each year and make National Insurance Contributions. (An accountant can help you with Self-Assessments). However, clients are less likely to work with contractors who are sole traders.
This is similar to a sole trader, but with two or more people work together as single company.
Contractors can choose to be employees of an umbrella company, which deals with things like sending invoices and chasing payments. It makes things a lot simpler for contractors at the expense of having to pay higher taxes due to being an employee